Competitionregulation

REGULATORY & MARKET ENVIRONMENT
Competition and regulation
IN A CONVERGED
BROADBA N D WORLD
Broadband Series
F E B R U A R Y 2 0 1 3
T e l e c o m m u n i c a t i o n D e v e l o p m e n t S e c t o r

Competition and regulation in a
converged broadband world
February 2013

This report was prepared by Dr. Christian Koboldt of DotEcon Limited, under the direction of the
Telecommunication Development Bureau (BDT) Regulatory and Market Environment Division (RME).
This report is part of a new series of ITU reports on broadband that are available online and free of
charge at the ITU Universe of Broadband portal: www.itu.int/broadband.
 Please consider the environment before printing this report.
 ITU 2013
All rights reserved. No part of this publication may be reproduced, by any means whatsoever, without the
prior written permission of ITU.

Competition and regulation in a converged broadband world
i
Table of contents
Page
Executive summary ............................................................................................................................... iii
1 Introduction ................................................................................................................................ 1
2 The changing broadband world .................................................................................................. 3
2.1 Services as the drivers of bandwidth demand .................................................................. 3
2.2 Bundling ............................................................................................................................ 5
2.3 Different mixes of fixed and mobile broadband technologies ......................................... 8
3 Market definition in a broadband world ................................................................................... 9
3.1 Some general points about market definition .................................................................. 10
3.2 Service-driven choice of networks and retail market definition ...................................... 12
3.3 Wholesale market definition ............................................................................................ 19
3.4 An illustration: are fixed and mobile broadband in the same market? ............................ 23
4 Significant Market Power (SMP) designation ............................................................................ 28
4.1 Some general points about SMP designation ................................................................... 28
4.2 Convergence, demand growth and SMP .......................................................................... 31
4.3 Vertical arrangements and bundling ................................................................................ 34
5 Regulation in a converged broadband world ............................................................................ 37
5.1 Traditional regulation of SMP operators .......................................................................... 38
5.2 Implications of convergence for regulation ...................................................................... 41
5.3 Conclusions ....................................................................................................................... 51
References ............................................................................................................................................. 55
Annex 1: A sample of broadband market definitions .......................................................................... 59
Europe ......................................................................................................................................... 59
Americas ...................................................................................................................................... 60
Asia .......................................................................................................................................... 61
Africa and Arab States ................................................................................................................. 61
Annex 2: Examples of approaches towards margin squeeze ............................................................... 63

iii
Preface
The past twenty years has been an extraordinary time for the development of information and
communication technologies (ICTs) – and with the ‘mobile miracle’ we have brought the benefits of ICTs
within reach of virtually all the world’s people. ITU has been in the forefront of this transformational
ascent and is today committed to continue to drive positive change in the sector and beyond. It is now
time to make the next step, and to ensure that everyone – wherever they live, and whatever their
circumstances – has access to the benefits of broadband. This is not just about delivering connectivity for
connectivity’s sake – or even about giving people access to the undoubted benefits of social
communications. It is about leveraging the power of broadband technologies – and especially mobile
technologies – to make the world a better place.
In 2010, ITU, in conjunction with UNESCO, launched the Broadband Commission for Digital Development –
to encourage governments to implement national broadband plans and to increase access to broadband
applications and services. The Commission is co-chaired by President Paul Kagame of Rwanda and Carlos
Slim, President of the Carlos Slim Foundation. We have over 50 Broadband Commissioners – all top-level
leaders in their field – representing governments, industry, academia and international agencies. At the
recent Broadband Leadership Summit held in October 2011 in Geneva, the Broadband Commission has
recognized broadband as a critical modern infrastructure contributing to economic growth and has set
four clear, new targets for making broadband policy universal and for boosting affordability and
broadband uptake. Out-of-the-box models that promote competition, innovation and growth of markets
are now needed to make the broadband opportunity reachable for all world citizens.
At ITU, the United Nations specialized agency for telecommunications and information and
communication technologies (ICTs), we are committed to playing a leading role in the development of the
digital economy through extending the benefits of advances in broadband and embracing the
opportunities it unleashes. The three ITU sectors – Radiocommunications, Standardization and
Development – are working together to meet these challenges and our collective success will be a key
factor in ensuring the provision of equitable broadband access throughout the world. The ITU Broadband
Reports are one contribution towards this commitment.
Dr. Hamadoun I. Touré
Secretary-General, ITU

v
Foreword
Broadband has become a key priority of the 21st Century, and I believe its transformative power as an
enabler for economic and social growth makes it an essential tool for empowering people, creating an
environment that nurtures the technological and service innovation, and triggering positive change in
business processes as well as in society as a whole. Increased adoption and use of broadband in the next
decade and beyond will be driven by the extent to which broadband-supported services and applications
are not only made available to, but are also relevant and affordable for consumers. And while the benefits
of broadband-enabled future are manifest, the broadband revolution has raised up new issues and
challenges.
In light of these developments, ITU launches a new series of ITU Broadband Reports. The first reports in
the series launched in 2012 focus on cutting edge policy, regulatory and economic aspects of broadband.
Other related areas and themes will be covered by subsequent reports including market analysis,
broadband infrastructure and implementation, and broadband-enabled applications. In addition, a series
of case studies will complement the resources already made available by ITU to all its many different
types of readers, but especially to ICT regulators and policy-makers.
This new series of reports is important for a number of reasons. First of all, the reports will focus on
topical issues of special interest for developed and developing countries alike. Secondly, the various
reports build on ITU’s recognized expertise in the area augmented by regular feedback from its
Membership. Last but not least, this series is important because it provides a meaningful contribution to
the work of the Broadband Commission for Digital Development. The findings of the ITU Broadband
Reports will trace paths towards the timely achievement of the ambitious but achievable goals set
recently by the Commission as well as provide concrete guidelines. As broadband is a field that’s growing
very fast, we need to constantly build knowledge for our economies and societies to thrive and evolve
into the future.
For these reasons, I am proud to inaugurate this first series of the ITU Broadband Reports and look
forward to furthering ITU’s work on the dynamic and exciting broadband ecosystem.
Brahima Sanou
Director, ITU Telecommunication Development Bureau

Executive summary
Across the world, broadband networks and the services to which they provide access are becoming an
increasingly important part of our daily lives. Technology and usage patterns are changing fast, and the
converging ICT sector looks very different from the traditional telecommunication environment of two
decades ago.
These changes pose challenges for regulatory policy.
• How should regulators identify the markets that ought to be regulated when the underlying
technology is evolving rapidly and broadband networks provide access to a wide and ever-changing
vii
range of services?
• How should they go about identifying which operators enjoy market power?
• What types of behaviour should concern policy makers, and how should regulators deal with
commercial strategies that can be both efficient and beneficial for consumers, but also have
anti-competitive effects?
This report takes as its starting point a number of salient facts about the converged broadband world.
Driven by the availability of novel and innovative services, demand for bandwidth is growing substantially.
Services rather than the underlying technology drive the customers’ choice of broadband connection. The
economies of scope brought about by convergence are reflected in bundling of services. A range of
different access technologies co-exists with mobile broadband services gaining in importance not just in
countries where fixed infrastructure is poor, but also in developed economies with almost universal fixed
line coverage.
The paper then discusses the implications of these developments for market definition. It gives a brief
summary of the key principles used by regulatory and competition authorities for establishing the
boundaries of the relevant market and then looks at the extent to which different broadband
technologies can be said to compete with each other in light of these principles.
Even though some retail customers may not have any choice of broadband connection – e.g. because
their requirements are so specific that they can be met only by one technology, or because they live in
areas where only one network is available – this does not necessarily matter for market definition. Market
boundaries are set not by those customers who cannot switch to alternatives, but those who can. As a
consequence, very different technologies may be linked through a chain of substitution. At the same time,
even if different technologies could compete on the basis of their technical capabilities, markets may be
separated because of exclusive agreements between network operators and service providers, or as a
result of bundling of services.
A brief discussion of the question whether discussion mobile and fixed broadband services are in the
same market provides an illustration of how these considerations may be applied in practice.
Unsurprisingly, the answer depends strongly on the extent to which the differences in the capabilities of
mobile and fixed broadband networks matter for end users given the range of services available – and it
may change over time as new services become available.
More generally, the role of services in the delineation of markets means that market boundaries are not
immutable: so even if mobile and fixed broadband services were fairly substitutable at present, they may
become less so as more bandwidth-intensive services are being developed. What is important is that
market boundaries are not determined by the technologies themselves, but by their capabilities, the
capacity they provide and the services that they support.
These changing market definitions matter when it comes to establishing market power. But convergence
has further implications that go beyond the simple re-drawing of market boundaries. The strong growth in
demand for bandwidth and the need for investment in network capacity – whether it be through
improvements to existing networks or the construction of new ones – change the nature of competition.
Such investment typically creates excess capacity that will only be filled over time, and competition during

this period might be much stronger than a simple look at market structure might suggest. Wherever
possible, promoting infrastructure-based competition can help to foster innovation, support service
differentiation and drive penetration.
The increasing importance of services and the effects of bundling strategies will need to be taken into
account when assessing market power. It may well be the case that market power in the supply of
broadband services flows from markets that have traditionally been the subject of regulatory control. This
could suggest that the remit of regulators be broadened to include services, such as television
programming, that have been shown to be important in driving take-up of broadband services (and this
has already happened in some jurisdictions).
However, simply extending the scope of regulatory controls may not be the best way of dealing with
these new challenges. Bearing in mind the inherent limitations of regulatory intervention, in particular in
relation to stimulating innovation, such intervention should be used sparingly and encourage the
development of competition rather than mimic the outcome of competitive markets. Given the sizeable
investments that are needed to meet the demand for more bandwidth – both in terms of serving a
greater number of end-users and providing more bandwidth over individual connections – regulators
need to be keenly aware of the impact of their decision on investment incentives. Well-established
approaches, e.g. for setting cost-oriented access charges, have shortcomings in this respect that have not
been fully acknowledged but that ought to be addressed going forward.
At the same time, it will become more difficult to establish hard and fast rules for behaviour that should
be caught in the regulatory net, and for the choice of remedies or restrictions that should be imposed. As
commercial strategies in a converged world become more complex, case-by-case assessment will have to
play a greater role. This may mean a greater reliance on general competition policy or a change in the
nature of regulatory obligations, making them more competition-policy like. Of course the procedural
details under which for example a general fair trading condition that is part of a licence might be enforced
could be quite different from the provisions of general competition law, but the remedies may need to
become more general and less prescriptive. Even where general competition law gains in importance, the
sectoral expertise of regulatory authorities will continue to be extremely valuable.
An immediate consequence of this is that coming up with general recommendations that would be
suitable for regulatory policy across a range of different jurisdictions with very different broadband
ecosystems and very different economic conditions is impossible. Depending on the specific conditions in
particular markets, rather different measures may be needed in order to deal with the issues raised by
convergence. All of these, however, ultimately derive from a common understanding of the main policy
principles.
viii

1 Introduction
Ex-ante regulation has been a prominent feature of the Information and Communications Technologies
(ICT) sector for many years. In particular, when telecommunication networks that had been constructed
and operated by state-controlled monopolies were privatized, or the provision of telecommunication
services was liberalized, regulation assumed a key role in promoting competition and protecting end
users. Regulatory controls were aimed at ensuring that control of network infrastructure that could not
readily be replicated could not be exploited to the detriment of end users, either by foreclosing
competition in other parts of the value chain or by charging excessive prices to final customers.
This process rested crucially on the imposition of ex-ante regulatory obligations on firms with the power
to frustrate the development of competition or to exploit customers. Such behaviour would of course also
be caught under competition law, and there are examples of countries, such as New Zealand, which
initially relied solely on competition law to support the process of liberalization.1 However, because
competition law relies on identifying instances of abusive behaviour after the fact on a case-by-case basis,
competition law remedies might be slow and the imposition of ex-ante obligations was generally seen to
be more effective.
Using wholesale access obligations2 to split the provision of services from the underlying network
infrastructure and using interconnection obligations to facilitate the deployment of competing
infrastructure has led to competition emerging in both services and network infrastructure. Even though
some network elements, such as the local loop, may ultimately not be replicable (or at least not viably so),
incumbents’ market shares have fallen dramatically almost everywhere as telecommunication markets
have morphed into the much wider ICT sector.
In the early stages of liberalization and market opening, establishing which operators should be regulated,
and what regulatory obligations should be imposed on them, was relatively straightforward.
• Services could be neatly distinguished with reference to the underlying network technology
(fixed and mobile voice services, for example, or local, national and international calls,
reflecting the parts of the network that were involved in their provision). This strong link
between services and underlying technologies provided national regulatory authorities
(NRAs) with a clear basis for the definition of ICT markets - where appropriate separated into
retail and wholesale services.
• Having delineated markets with reference to the underlying technologies, establishing which
operators should be subject to regulatory obligations was relatively straightforward, too.
Simple market share measures would often be sufficient for establishing significant market
power (SMP) in the relevant markets (although the US Federal Communications
Commission’s (FCC) declaration in 1993 that AT&T despite a market share in excess of 55 per
cent was no longer dominant in the long-distance market, for example, shows that standard
competition analysis has been playing a substantial role throughout).3
1 The liberalization process in New Zealand started in the late 1980s, and Telecom New Zealand was privatized in 1990,
but sector-specific regulation was not introduced until ten years later. For a brief overview see The Practice Notice on New
Zealand in the ITU-infoDev ICT Regulation Toolkit (www.ictregulationtoolkit.org/en/PracticeNote.2597.html).
2 ‘Access obligations’ is here used as a short hand for a wide range of obligations imposed on regulated firms, covering
the requirement to offer access at cost-based priced and on terms that are transparent and non-discriminatory, supported
by appropriate cost accounting and accounting separation obligations.
3 For a detailed description of the FCC’s analysis, see Jamison et al. (2009).
1

2
• Emerging competition was best promoted through imposing interconnection obligations to
support new network operators, and wholesale access obligation to enable service
competition where competition in the underlying network infrastructure was lacking. Of
course, trade-offs had to be made: for example, lowering access charges would promote
service competition, but would make life more difficult for those having invested in new
infrastructure whilst higher charges would create incentives for investment in new
infrastructure, but hurt end users in the short term. However, starting from a legacy
monopoly network infrastructure, most of the choices were not too difficult to make.
The success of regulation in opening up markets to competition has removed many of these certainties.
The development of competition creates a need for assessing whether it has become sufficiently well-established
to warrant the removal of ex-ante regulatory controls. As markets become competitive, the
on-going protection of consumers from anti-competitive behaviour can be entrusted to national
competition authorities (NCAs) where these exist, or to the application of competition law by NRAs with
concurrent competition powers, and regulatory obligation can be removed.
Moreover, fundamental technological changes over recent years have eroded the close link between
services and technologies. The European Commission’s decision to replace the regulatory framework for
telecommunications that pushed the process of liberalization (the so-called ‘Open Network Provision’
(ONP) framework of 1998) with one that covered all electronic communication networks and services in
2003 is an example of how regulatory authorities respond to convergence, which allows the same service
to be provided over a number of different networks. Although this implies on the one hand that
competition between networks may become more effective, it also means that any individual network
can provide access to a greater range of services than previously, leading to potentially much stronger
economies of scale and scope than before.
In line with this, demand for data services and broadband penetration have been growing, and continue
to grow. In a number of countries, this has been accompanied by investment in upgrading existing
infrastructures (e.g. xDSL services), rolling out new networks (fibre access networks) and/or improving the
capabilities and extending the capacity of wireless networks.
Convergence in the broadband world has a number of implications:
• The traditional link between network technology and the service that is provided over the
network is weakened or disappears completely, meaning that, going forward, different types
of networks are more likely to be substitutable for each other.
• Exploiting the improved capabilities of networks, there is an increased prevalence of bundled
offerings (dual, triple and quad play).
• There is a need for substantial investment in network infrastructure to satisfy growing
demand.
• Networks turn into platforms that bring together service providers and end users.
This report argues that, as a result of these developments, both defining markets and establishing market
power for the purpose of deciding where ex-ante regulation is necessary, and on which firms regulatory
obligations should be imposed, are becoming more complex tasks:
• Market boundaries are likely to change at the retail level as the specific network over which
services are being delivered becomes less relevant, and the characteristics of the service
bundle matter more.
• At the wholesale level, whilst different networks may have become more substitutable
market power may be exercised in relation to services that have traditionally not been the
subject of ICT regulation (e.g. ‘must-have’ content such as premium television programming
which is capable of driving the take-up of connections, or mobile payment platforms that
may be available exclusively on some networks).

• Greater emphasis may need to be placed on the platform nature (or multi-sidedness) of
markets, i.e. the fact that operators of broadband networks essentially serve two masters –
service providers who wish to reach end users, and end users who seek access to services.
• Greater emphasis may also need to be given to promoting investment in new infrastructure
3
and services versus promoting access to existing infrastructure.
• The speed with which markets may change needs to be considered in relation to the time
required for regulatory remedies to be adopted and become established – it is important to
avoid situations in which regulation that has been designed to deal with yesterday’s
problems stifles innovation and holds back the development of the markets.
All of this suggests that it will become increasingly difficult to define ex-ante where problems might arise,
and put in place controls that would effectively address these. Therefore a greater reliance on the ex-post
application of competition law might be appropriate, be it through greater involvement of NCAs or
through the strengthening of concurrently applied competition powers by NRAs. Regulatory obligations
may have to move from relatively simple access and cost-accounting obligations to more complex,
effects-based restrictions on the behaviour of licensed SMP operators.
This report begins by providing a brief overview of some salient facts about broadband: rapid take-up of
broadband around the world driven by attractive services, an increased use of bundled offers and a mix of
underlying technologies (Section 2). This is followed by a discussion of the implications of these
developments for market definition (Section 3) and the identification of operators with SMP (Section 4).
Section 5 then considers the consequences for regulation in a converged broadband world.
2 The changing broadband world
Historically, services provided over telecommunications networks were very specific and closely tied to
the underlying network technology. By comparison with today’s telecommunications environment, the
past may be characterised as a world with single-service networks. The significant and rapid technological
developments and the move towards the use of IP-based protocols throughout the network over the past
years have changed this substantially. Because understanding the link between networks, their technical
capabilities, and the services to which they can provide access is crucial for market definition, this section
provides a brief summary of these developments.
2.1 Services as the drivers of bandwidth demand
Broadband traffic is forecast to grow substantially over the next few years. Estimates prepared by Cisco
(2011, 2012a) suggest that:
• the monthly traffic of the world’s average Internet user will increase from 3.36 gigabytes in
2012 to 24.8 gigabytes by 2015;
• in Western Europe, monthly traffic per subscriber will reach 47.4 Gigabytes in 2015, up 270
per cent from its 2010 level and total monthly traffic per month will grow from 7.2 exabytes
per month in 2011 to 24.3 exabytes per month in 2016- a compound annual growth rate of
27 per cent;
• over the same period the Middle East and Africa will experience the strongest growth in IP
traffic at a compound annual growth rate of 57 per cent;
• the Asia-Pacific region will lead demand with IP Traffic at more than 40 exabytes per month
by 2016; and
• overall, global IP traffic is set to increase from 30.7 exabytes per month to 109.5 exabytes per
month from 2011 to 2016.
The forecast growth in traffic is phenomenal – and it is to a large extent service-driven. Unlike the single-service
telecommunications networks of the past, broadband networks provide more than a means of

allowing different end users to communicate with each other. Broadband networks support the delivery
of a wide range of ‘over-the-top’ (OTT) services (such as on-demand video services, cloud computing or
interactive gaming), and provide the conduit between the suppliers of such services and their customers.
In economic terms, this is an interesting and important difference: it is not only end customers but also
OTT players who benefit from the connectivity provided by broadband networks, but only the former pay
for broadband services whilst the latter do often not make any direct contribution towards the cost of
providing the connectivity that allows them to reach their customers.
As shown in Figure 1, internet video is the major driver of the growth in consumer internet traffic, which
is estimated to increase from 10.4 exabytes per month globally to over 44.2 exabytes between 2001 and
2016 (which corresponds to a compound annual growth rate of 34 per cent). Broadband networks are
increasingly used for the delivery of long-form video provided by services such as ‘LOVEFiLM Instant’ and
‘NetFlix’4 rather than short-form Internet video traffic such as video clips on YouTube.5 For example:
4
• in Western Europe, where these services are available over both fixed and mobile networks,
internet video traffic is expected to account for 60.3 per cent of all consumer Internet traffic
in 2016, up from 44.8 per cent in 2011 (Cisco, 2012a); and
• in China, it is predicted that by 2016, 79 per cent of all consumer internet traffic will be video
content, up from 64 per cent in 2011 (Cisco, 2012b).
4 According to Sandvine (2011), “Netflix accounts for 29.7% of peak period downstream traffic” across Americas fixed
access networks.
5 On Monday 9th Jan 2012, Amazon’s LOVEFiLM announced having reached two million subscribers, “driven by a record
number of sign-ups in the fourth quarter of 2011. The Amazon-owned service added hundreds of thousands of new
customers that now have access to LOVEFiLM Instant, which provides a unique offering of instantly streamed film and TV
series, combined with the vast selection of DVD, Blu-ray and Video Game rentals. This is the fastest customer growth rate
LOVEFiLM has experienced since 2009” when it was first introduced. See http://corporate.blog.lovefilm.com/a-press-releases/
amazon%E2%80%99s-lovefilm-hits-2-million-members.html#more-1403

5
Figure 1: Global Consumer Internet Traffic per Application (exabytes per month), forecast 2011-2016
Source: Cisco (2012a)
Users will increasingly require higher broadband speeds in order to make most of applications such as
video-on-demand streaming, online gaming, cloud computing or other services. Consequently, the
development of newer, faster broadband technologies will be a predominant feature of future broadband
markets, both through FTTx services for fixed broadband, and 4G and WiMAX for mobile broadband
services. Most countries have also set out ambitious national broadband plans, seeking to achieve
widespread coverage of higher speed networks in the not-too-distant future (see OECD, 2011b).
Regulators and competition authorities need to understand the importance of services and content as a
driver of demand growth and network choice when looking at a converged broadband world. Because
demand for connectivity depends on the availability of services that exploit the capabilities of the
network, service availability is key. But at the same time, the incentives for the development of such
services depend crucially on the expectation that there will be a sufficiently large addressable market.
This can create a co-ordination problem that needs to be overcome if the potential for new services,
supported by improved networks, is to be realized.
2.2 Bundling
Bundling of services that could – at least in principle – be provided separately has always been a feature
of telecommunications markets. Access (line rental) and calling services were traditionally offered as a
bundled service, and the fact that with liberalization it was possible to buy access from one provider but
get calls from another probably surprised many users. Value added services such as call waiting or call
divert were also often bundled with ‘basic’ telecommunications service. With the roll-out of cable
networks, bundling of telecommunications services with television content (‘dual play’) has became
prevalent.
Bundled service offers are becoming increasingly common in the broadband world. Broadband access
itself is often bundled with ‘traditional’ telecommunications services such as line rental and fixed voice

calls, but more typical bundles are ‘triple-play’ combinations of fixed-voice, data and video services, and
sometimes quad-play packages further include mobile services (see Figure 2 below).
Figure 2: Take-up of multi-service ‘bundles’ among fixed broadband customers, United Kingdom, 2012
Source: Ofcom (2012)
Historically service bundles may have involved multiple networks (e.g. a fixed line and a DTH broadcast
satellite). The reason for bundling often was customers’ demand for one-stop-shop provision of services,
with cost savings being limited to unified billing and customer support. Convergence means that service
bundles can be delivered over a single network, creating economies of scale and scope and associated
cost savings that go beyond those available before. With increasing bandwidth availability, bundling may
become the common form of delivery (for example, internet, VOIP and IPTV all provided over a single
broadband connection), and service bundles may grow to include further OTT services.
These bundles are in most cases offered alongside standalone services (so-called ‘mixed bundling’).6 The
OECD (2011a, p3) finds that “[b]roadband bundles are typically sold with a significant price discount over
stand-alone prices. The average bundled discount compared with buying the services separately is USD 15
(PPP) per month or 26%. The average price of a triple-play bundle across all countries and operators is USD
65 (PPP) per month, while the median price is USD 59 PPP. The average entry-level price for a triple-play
bundle is USD 41 PPP per month.”
Figure 3 below gives an illustration of the savings across OECD countries, based on the most recent survey
undertaken by the OECD. The average saving on triple-play bundles is approximately 27 per cent.
6 This is different from ‘pure bundling’ or ‘tying’, where only packages are on offer. A 2011 report by the OECD analysing
over 2 000 offers combining broadband, fixed-line telecommunications and television services from 90 firms in 30 countries
found that more than three quarters of operators allowed customers to purchase broadband on a stand-alone basis. Tying
with a fixed line was relatively common (17%), but tying to a television services was not (at 4%), and only 2% of offers
required that all three services be taken in order to obtain broadband. For a general discussion of bundling and tying, and
their impact on competition see Nalebuff (1999).
6

Figure 3: Comparison of minimum prices for video/voice/data if purchased separately and as a bundle,
7
Oct 2009, USD PPP per month
Source: OECD (2011a)
Bundling of service seems to be regarded by operators as a key strategy for driving take-up. For example:
• in July 2011, Zimbabwean ISP Aptics is reported to have procured equipment for the roll-out
of a WiMAX wireless broadband service, offering customers a bundle of internet and data
services, voice services and mobile services, to drive take-up;7
• in February 2010, “Moldova’s incumbent telco Moldtelecom … announced the launch of
its IPTV service, offering 30 TV channels, video on demand (VoD) and other interactive
services. … The operator has unveiled a range of tariff plans, including three double-play
packages – Duo Start, Duo Optim and Duo Plus – bundling the TV service with a broadband
internet connection”;8
• UAE incumbent Etisalat launched its Abu Dhabi fibre-optic network in December 2009,
offering triple-play packages covering landline telephony, broadband and IP television
services from May 2010 onwards. By April 2011, Etisalat announced that it had completed its
fibre build, making Abu Dhabi “the first capital in the world to be entirely connected to a FTTx
network.”9
Exploiting convergent technologies, service bundles may become more differentiated in future and
include components such as ‘cloud storage’ or other content-rich services (e.g. gaming applications). For
example, in March 2012, Mauritian telecoms operator Bharat Telecom Ltd has announced its launch of a
7 www.telegeography.com/products/commsupdate/articles/2011/07/29/airspan-equipment-powering-zimbabwe-wimax-
network/index.html
8 www.telegeography.com/products/commsupdate/articles/2010/02/24/moldtelecom-unveils-iptv-offering/index.html
9 www.telegeography.com/products/commsupdate/articles/2011/04/27/etisalat-connects-entire-abu-dhabi-to-fttx/
index.html

FTTH network that will deliver broadband internet and IPTV, and offer a “carrier backbone for other
service providers in the country operating in the gaming and WebTV business spheres.”10
2.3 Different mixes of fixed and mobile broadband technologies
There is notable variation in the role played by mobile and fixed broadband services, and across fixed
broadband technologies used throughout the world.
DSL is the main fixed broadband technology worldwide with over 60 per cent of connections in the top
ten countries (by number of subscribers) using this type of technology (Point Topic 2011).11 Cable
accounts for almost 20 per cent of broadband connections in these countries, with the US being the
largest cable market. The remainder are largely FTTH connections, which are currently prevalent in
countries such as the Republic of Korea and Japan (Point Topic 2011) and are expected to play a greater
role in the future in other countries.12 Globally, fixed broadband connections stood at 591 million by the
end of 2011, having doubled over the previous five years, and should have reached 612 million by the end
of March 2012 (Point Topic, 2012b).
This number is dwarfed by mobile broadband subscriptions, which stood at 1.09bn globally13 by the end
of 2011. In many developing nations14 where the fixed network infrastructure is poor, mobile technology
provides the main form of internet access. With 62 per cent of the world’s total number of Internet users
coming from these nations at the end of 2011 (up from 44 per cent five years earlier – see ITU, 2012a), it
should not be surprising that mobile broadband penetration in these countries is often substantially
higher than fixed penetration, and is expected to grow further.15
Growth in mobile broadband connections is however not purely the consequence of poor fixed network
infrastructure. Changing usage patterns supported by mobile data cards and smartphones, and
substantial improvements in mobile technology (most notably the shift towards 4G networks which offer
substantially higher data rates) mean that mobile broadband is becoming a strong contender even in
countries with a well-developed fixed network infrastructure (see Box 1).
Overall, Ericsson (2012) forecasts global mobile traffic to increase from around 1 000 petabytes per
month in 2012 to over 8 000 petabytes by 2017.
10 www.telegeography.com/products/commsupdate/articles/2012/03/20/bharat-telecom-mauritius-launches-ftth-service/
8
index.html
11 The top 10 broadband fixed broadband markets are (China, USA, Japan, Germany, France, UK, the Republic of Korea,
Russian Federation, Brazil, Italy and India.
12 In particular, ambitious targets for available bandwidth (such as the European Commission’s Digital Agenda or the US
National Broadband plan (Federal Communications Commission) may have a similar effect as the u-Japan policy set out by
the Japanese the Ministry of Internal Affairs and Communications (MIC) in 2005 (see Business Software Alliance, 2012) or
the Korean Broadband Convergence Network Initiative (BcN) of 2004 (see Ovum, 2009).
13 www.itu.int/ITU-D/ict/statistics/at_glance/keytelecom.html
14 The average fixed penetration is 4.8% in developing economies compared with 26% in developed countries; see ITU
(2012a). www.itu.int/ITU-D/treg/publications/trends12.html
15 Even in some Sub-Saharan African countries where capital cities are connected to ‘international fibre’ and fixed
broadband connections in the major cities is developing it will remain costly to connect rural communities with costs
escalating the further away from the core network the communities are (see Bernal, 2011, pp 26-28).

Box 1: Growth of mobile broadband penetration in countries with high fixed penetration, 2009-2011
The table below shows the change in fixed and mobile broadband penetration for some of the countries
with the highest level of fixed broadband penetration in 2009. This shows that even in countries where
fixed broadband services are well established, and take-up is high, mobile broadband is growing
dramatically, with average growth rates of around 26 per cent from 2010 to 2011, compared with a 3 per
cent growth in the penetration of fixed broadband over the same period. On average across those
countries, there are 56.7 mobile broadband connections per 100 inhabitants compared with 34 fixed
broadband connections.
9
Source: ITU World Telecommunication/ICT indicators database, www.itu.int/icteye.
3 Market definition in a broadband world
As a general principle, the scope of regulatory intervention should be limited to markets where
competition is ineffective or cannot develop without some assistance that protects smaller firms and new
entrants from being pushed aside by strong incumbents, and regulatory obligations should only be
imposed on firms that are capable of distorting competition, harming rivals or exploiting consumers.
Regulation should be withdrawn when markets become competitive. This acknowledges the inherent
limitations of regulatory intervention that results from regulators generally having less information about
the costs of the regulated firms and the needs of customers and having fewer instruments at their
disposal than they would need to achieve the outcomes that would occur in an effectively competitive
market.
This means that regulators need to establish which firms are likely to be in a position to exploit their
customers, or behave in ways that make it more difficult for their competitors to gain a foothold. Such a
position is generally described as one of significant market power (SMP), and it can only exist in relation
to a particular market within which firms compete. Identifying these markets is therefore a key task.
Defining the markets that are susceptible to ex-ante regulation generally involves a process of market
analysis that is repeated at regular intervals. It may take a list of candidate markets as its starting point,
and may be more or less formalised. As part of the market analysis process, regulators will typically apply

principles for the definition of relevant markets that often resemble those that are used in the application
of general competition law where market definition also plays a key role.
In competition investigations, identifying the relevant market is generally the first step, and an invaluable
tool helping national competition authorities (NCAs) to understand the nature and strengths of
competitive constraints. This in turn is a pre-condition for establishing the presence of market power and
to gauge the effects of specific behaviour or agreements on competition. The main difference between
market definition in a regulatory environment and in the enforcement of competition law is that
regulators need to define markets prospectively whereas competition authorities typically respond to a
complaint and look at market boundaries ex post and in the context of a specific investigation.16
This section briefly discusses some of the general issues that arise in the course of market definition, and
then proceeds to look at the challenges posed by convergence.
3.1 Some general points about market definition
Demand and supply side substitution
In both regulation and competition policy, markets are generally defined in terms of the products and
services that are considered to be:
10
• sufficiently substitutable from the perspective of their users so that demand can readily
move between them (demand side substitutability); or
• sufficiently similar from the perspective of suppliers so that a firm supplying one of them
would be able to supply the others on short notice and without having to make significant
investments (supply-side substitution).17
Relevant markets also have a geographic dimension. The relevant geographic market comprises the area
within which such adjustments can take place with sufficient ease to impose a competitive constraint.18
In some cases, the precise definition of the market may not matter, as a firm may enjoy significant market
power regardless of whether the market is defined more narrowly or more widely. For example, if the
incumbent fixed line operator also is the sole provider of mobile telephony services, the need for
regulatory controls and the identity of the firm that should be subject to obligations does not depend on
whether fixed and mobile telephony services are considered to be in the same market or in separate
ones. In general, however, identifying market boundaries correctly does matter. The tool commonly used
for capturing competitive constraints is the so-called ‘hypothetical monopolist test’ (see box below).
Box 2: The hypothetical monopolist test
The hypothetical monopolist (or SSNIP) test is a tool that is commonly used by NCAs and NRAs in
establishing the boundaries of the relevant market. It is intended to capture demand and supply side
substitution by asking whether a firm that is the exclusive provider of a particular set of products or
services (the hypothetical monopolist) could profitably increase prices. If this is the case, then the
products and services under consideration constitute the relevant market. If it is not the case because
customers would switch to alternative products and services in response to a price increase, or suppliers
16 Merger control where competition authorities will need to define markets prospectively is an obvious exception to this.
17 The key difference between supply side substation and new entry is the timeframe in which firms who are currently not
providing the good or service can commence supply, and the ease with which they can do so. Supply side substitution
occurs in the short run without the need for additional investment, whereas entry may have substantial lead periods and
may require new entrants to make significant investments. For a brief discussion of market definition in a regulatory
context, see Section 2.2.1 of the ICT Regulation Toolkit (www.ictregulationtoolkit.org/en/Section.3538.html)
18 For a detailed discussion see, for example, European Commission (1997).

of such alternative products or services would commence supply of the products currently offered by the
hypothetical monopolist, then the relevant market will have to include at least these alternatives.
Starting from the smallest conceivable set of products (for example fixed broadband connections
providing speeds in a specific range), one would ask whether a hypothetical monopolist offering these
products could increase its profits by introducing a small but significant non-transitory increase in price
(SSNIP). If the answer is ‘no’ the products to which customers would switch or whose suppliers would
offer the reference product will be included, and the test is then repeated until a set of products is found
over which a monopolistic supplier could profitably sustain such a price increase.19 In a similar way to
product market definition, a geographic market definition would start from a narrow geographic area and
apply the SSNIP test over wider geographic areas as appropriate.
Davies and Garcés (2009) describe a number of techniques that can be used to assess the profitability or
otherwise of a price increase.
One potential methodological pitfall in applying the SSNIP test is the so-called ‘cellophane fallacy’ (named
after a US antitrust case involving DuPont, the manufacturer of the cellophane plastic wrap in the US):
the cellophane fallacy refers to the observation that a market that is served by an actual monopolist
would wrongly be considered too narrow if the SSNIP test were conducted using the market price as its
starting point.20 This is because a profit-maximising monopolist sets its price at the point where any
further increase becomes unprofitable. The naïve application of the SSNIP test would thus find that a
small price increase above the market price is not profitable and conclude that additional products need
to be included in the relevant market. In order to avoid this problem, it is important to consider the
profitability of a price increase over and above the competitive level, which will be different from the
price if the market is affected by a competition problem.
Requiring knowledge of the competitive price level in order to avoid the cellophane fallacy leads to an
obvious conundrum, however: if the competitive price level could be established without reference to the
market price, then the difference between the market price and the competitive price could be used to
establish the presence of market power, and the entire market definition exercise would be unnecessary.
Source: Author
Retail and wholesale markets
A key distinction can be drawn between retail markets where sales are being made to end users, and
wholesale markets where customers are businesses who source inputs that will be used to sell to other
businesses or, ultimately, to end users.
Given the history of telecommunications liberalization with service competition being introduced on the
basis of regulated access to key inputs, this distinction is particularly important for regulatory purposes.
19 If the price increase is not profitable for the hypothetical monopolist because customers would switch away to
alternatives, or firms offering products would readily switch some of their capacity to supply the product in question, then
the scope is expanded to include those additional products or services. In other words, the products that consumers would
credibly switch to in response to such a price increase, or the products whose suppliers could easily satisfy demand, would
be included in the relevant product market. On the supply side, practitioners would look at the ability of alternative
undertakings to be able to supply that particular product without incurring substantial sunk (non-recoverable) costs. For
example, if the focal product under consideration were wholesale access to fixed infrastructure of an incumbent operator,
it is unlikely that such technology may be replicated quickly, as significant investment in civil works and rolling out network
infrastructure would be required, and most of the costs involved would be sunk. The analysis would be repeated, assuming
a hypothetical monopolist of the larger set of products, until the point at which the hypothetical monopolist would be able
to sustain profitably a price increase over the set. See OFT (2004).
20 For a more detailed discussion of the cellophane fallacy see a presentation by Philip Nelson available from the US DOJ
website (www.justice.gov/atr/public/hearings/single_firm/docs/222008.pdf).
11

Scale and scope economies in combination with sunk costs may limit the potential for competition mainly
in relation to network infrastructure (or at least some parts of the network), with other parts of the value
chain being in principle open to competition.
By identifying wholesale markets and using ex-ante regulation to prevent abuses of market power at the
wholesale level (for example, through defining appropriate access and interconnection obligations)
regulators try to ensure that “as much of the value chain is open to normal competition processes as
possible, thereby delivering the best outcomes for end-users”.21
Exposing a greater proportion of the value chain to competition is beneficial because competition is
usually more effective than regulation in promoting service differentiation and innovation. The principle
that regulation should focus on wholesale rather than retail markets is particularly important in relation
to broadband services because these services are far from mature and service innovation is an important
dimension of the competitive process (see ITU 2012c).
3.2 Service-driven choice of networks and retail market definition
As discussed above, one of the main characteristics of broadband networks is that they are multi-service
networks. Whilst traditional telecommunications networks provided one (and essentially only one) service
– namely voice (later augmented by fax) communications between those connected to the network – a
broadband connection is a conduit that enables consumers to access a plethora of services, and gives
service providers the means to distribute their offerings. This is at the core of convergence, and means
that broadband networks can be seen as platforms through which service providers and consumers
interact.22 The platform nature of broadband networks implies that a broadband network will be more
attractive to potential end users if it provides access to better services and a greater range of services,
and be more attractive for service provider if it allows them to reach a greater number of users.
To some extent, the strength of this specific type of network effect is masked by the fact that – at present,
and at least in principle – services provided over the public internet are universally accessible regardless
of the network connection used by the customer. However, the bandwidth that is available through
particular types of connections imposes practical limitations, and it may well be possible to restrict access
to particular services to customers of particular networks.23
In any case, differences in the technological capabilities of networks matter largely because of the
differences in the range of services to which a customer may gain access. For example, whether there is a
single broadband market, or whether it would be more appropriate to distinguish markets for basic and
ultra-fast broadband depends on whether some services are accessible through one, but not the other.
Similarly, depending on whether there are services that require near-symmetrical upload and download
speeds, broadband networks that support such symmetrical speeds may be in a different market from
those that offer high download, but limited upload speeds.
This means that the definition of relevant markets in relation to broadband connections is strongly
affected by the nature of services to which broadband customers might gain access, and that market
boundaries may change over time. For example, broadband services that at present are considered to be
substitutable may not be so in the future if services that require high-bandwidth low-latency connections
emerge and become mainstream.
21 See European Commission (2007a), Clause 15.
22 For a detailed discussion of the economic issues that arise in multi-sided markets or platforms, see for example Evans
and Schmalensee (2008) or Evans et al. (2011).
23 The ‘walled garden’ approach originally adopted by AOL is a good example for limiting access to services to the
subscribers of the firm that provides the connectivity. Content-rich portals have also been used by many mobile operators
aiming to provide their subscribers not just with connectivity, but also exclusive access to services.
12

NRAs may need to define a number of sub-markets characterized by the ability of the network to provide
consumers with the experiences they require. For example, if broadband networks provide the main way
of accessing video content in the future, then the question whether a particular type of network provides
the bandwidth and the latency to support multiple high-definition video streams may matter for market
definition, even if it does not at present. This may well require more complex assessments of
substitutability than have been undertaken in the past.
The role of ‘marginal’ customers
Consider the extreme case of an ultra-fast fibre-to-the-home (FTTH) network supporting near-symmetrical
speeds of 100 Mbit/s on the one hand, and a basic ADSL network with an effective download
speed of 2 Mbit/s, and upload speeds of 256 kbit/s on the other hand. Those networks appear to be too
different to be substitutable from the perspective of customers who wish to access bandwidth-hungry
services that only the FTTH network can deliver. Such customers do not have an effective choice.
However, this does not necessarily matter for market definition. If there is a sufficiently large group of
customers for whom access to bandwidth-intensive services is not crucially important, and who might
therefore be prepared to switch to the slower network if a hypothetical monopolist of FTTH services were
to increase the price above the competitive level, such a price increase would be unprofitable. It is such
‘marginal’ customers who determine the strength of competitive constraints that one type of broadband
network exercises in relation to the other. Market definition needs to focus on these customers rather
than focusing on those who would not consider switching (so-called ‘captive’ customers).
The SSNIP test, by focusing on the profitability of a small price increase, should help in this regard.
However, it may also sometimes ignore the ability of suppliers to charge different prices to captive and
non-captive customers (i.e. to engage in so-called ‘price discrimination’). If a supplier can exploit the fact
that some customers may not be willing to switch to alternative products by charging them a higher price,
then it may be appropriate to identify separate markets, or define markets more narrowly.24 Such price
discrimination may happen in a number of ways, and does not require that the operator is able to identify
captive and non-captive customers. For example, offering a menu of tariffs and allowing customers to pick
the one that best suits their needs can be used as a way of segmenting customers into different groups.25
Depending on how effective these strategies are, it may then be appropriate to define separate markets
for different types of tariff packages, for example.
Note that the relative proportion of captive and non-captive, marginal consumers may change as the
underlying services mature: where in the early stages of development of a bandwidth-hungry services
only the small group of early adopters may be considered captive, the proportion of captive customers
may grow over time as the service acquires mass market appeal. These changes should be picked up in
the course of the periodic market analyses undertaken by regulatory authorities.
Chains of substitution
The role of marginal consumers is important when looking at chains of substitution. Even if the two
networks described above may not be directly substitutable from the perspective of any particular user,
they may be part of the same market if they are linked by a chain of substitution. For example, there may
be a VDSL network that provides upload and download speeds that lie between those offered by the FTTH
network and those available via ADSL. Even though nobody would consider the ADSL connection to be a
24 The role of price discrimination in relation to market definition is considered, for example, in the merger guidelines in
Australia, Canada, the EC, Finland, New Zealand, the UK and the US (see Leddy et al., 2005). Price discrimination may mean
that an otherwise unprofitable price increase pays off, and thus would lead to the identification of smaller markets (see, for
example, Strand, 2008).
25 This is so-called ‘third degree price discrimination’. For a simple and accessible discussion of the different forms of price
discrimination, see the tutorial provided at http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.
13
html.

substitute for a FTTH connection, there may be some customers who would move from FTTH to VDSL in
response to an increase in the price of FTTH connectivity above the competitive level, and there may
equally be customers who would consider ADSL to be an alternative to VDSL and would switch from one
to the other in response to a price increase (see Figure 4). In this case, all three types of networks might
be part of the same market.
Figure 4: Chain of substitution – a stylized example
Source: Author
Note that in the case where markets are defined on the basis of a chain of substitution, they may contain
products with substantially different characteristics that sell at substantially different prices. This is purely
the consequence of the fact that what matters for market definition is the extent to which different
products and services constrain each others’ prices, whether directly or indirectly through a chain of
substitution, rather than how similar their prices and product characteristics are.
Again, it is important to appreciate that a chain of substitution may form or break depending on the
adoption of underlying services.
Geographic footprints
The proportion of customers who might be able and willing to switch between networks and the impact
that such switching would have on market boundaries is also relevant in relation to geographic markets
where networks have different geographic footprints. Specifically, networks that cover different
geographic areas may be in the same market if their footprints overlap to a sufficient extent and they
employ geographically uniform pricing strategies.
Particularly in the case of fixed broadband connections, a customer’s choice between different suppliers
will depend on the ability of broadband providers to provide services to a specific location. As such, the
ability to switch between different networks will depend on the reach of alternative networks and,
importantly for market definition, will also depend on the extent to which alternative operators can
quickly expand their reach without significant cost.
While many NRAs continue to define the market for broadband at a national level, often based on the fact
that the incumbent has national coverage, some countries have deregulated the market in certain
locations on the basis that there are separate geographical markets. For example in 2009, the Portuguese
regulator, Anacom, received approval from the EC to deregulate parts of the wholesale broadband access
market on a geographical basis. Anacom had proposed to deregulate in mainly densely populated areas
where there are at least three operators and a high number of households with access to the cable
network – these areas accounted for 61 per cent of all Portuguese broadband lines (OECD, 2010, p 37).
14

In other cases, regulators may instead decide to impose differentiated remedies in a single, national
market. For example, in 2008, as part of the market review process, the Austrian regulator proposed to
define a single national market for wholesale broadband in which the incumbent, Telekom Austria (TA)
would be designated as having SMP. However, while TA was considered to have SMP at the national level,
it was recognized that there were particular regions where there was less competition from other
infrastructure operators. For example, in less populated, rural areas, TA was the only operator. The
regulatory authority proposed to address these different competitive pressures in different regions by
applying differentiated remedies.26
The need to define broadband access markets geographically may become increasingly important during
the transition to new ultra-fast networks. For example, given the heterogeneity of different geographic
areas, ultra-fast networks are likely to be rolled out first in the most ‘profitable’ areas (e.g. densely
populated urban areas) where economies of scale and scope can easily be realized before extending to
other areas. Differences in demand and supply characteristics in different areas may require markets to
be defined differently by region, at least in the short to medium term, if rollout of new competitive
networks is slow.
As noted above, even in some sub-Sahara African countries where capital cities are connected to
‘international fibre’ and fixed broadband connections in the major cities are gaining in importance, it will
remain costly to connect rural communities with costs escalating the further away from the core network
the communities are (Bernal, 2011). Thus, in these countries, it may be necessary to consider different
markets depending on the geography, as customers in rural areas will not have the same choice of
services and networks as in the densely populated urban centres. The increasing coverage of 3G, and the
future roll-out of 4G mobile networks may fill gaps in the chain of substitution, as discussed above, but
the strength of the constraints this creates need to be assessed on a case-by-case basis.
One-way substitution
It may well be the case that customers would be prepared to switch from the less capable network to the
more capable one (e.g. trade up from ADSL to VDSL in response to an increase in the price of ADSL
services), but not in the other direction. This means that VDSL prices impose a strong constraint on the
pricing of ADSL services, but that the constraining effect in the other direction is perhaps less strong.
While at present no comprehensive analysis in relation to broadband service may have been undertaken,
one-way substitutability has been discussed extensively in relation to the competitive interaction
between fixed and mobile voice services. For example, as BEREC (2011) reports, the Finnish regulator
FICORA found “that retail fixed access for voice services was fully substitutable with mobile access
services, but not the other way around. That is, there was no two-way substitution between these services.
If there was a SSNIP of retail fixed access services, fixed subscribers would switch to mobile telephony
subscriptions. But, if there was a SSNIP of retail mobile access services, mobile subscribers would not
switch to fixed telephony subscriptions.” Thus, one-way substitution has important implications for
market definition. In Finland, FICORA concluded that, “the non symmetric substitution lead to the
definition of two separate markets: retail mobile access is a distinct adjacent product market which gives
rise to competitive constraints being exercised on operators in the fixed access market.”
Similar considerations may well arise in the context of substitution between ‘high-speed’ and ‘regular-speed’
broadband services. For example in the United States, the FCC, the Federal Trade Commission
(FTC) and the Department of Justice (DOJ) have all independently ruled that the provision of residential
26 The regulator proposed to divide the country into two areas based on the following criteria: “(i) the number of large
operators present in the footprint of each of the 1,480 Main Distribution Frames (MDFs) operated by TA; (ii) the customer
density of the MDF area; and (iii) TA's market share in each of the MDF areas.” However, while the EC concluded that the
Austrian regulator’s finding of a national geographic market and the imposition of differentiated remedies was based on
sufficiently coherent and cogent evidence, the regulator’s decision was later appealed and overturned in the national
courts. See OECD (2010), pp 39-40.
15

high speed broadband internet access service is a distinct market in its own right compared to narrow
band services due to the benefits of ‘trading up’ from narrowband to broadband.27
Depending on how ‘one-way’ substitutability is captured in the definition of the relevant market, it may
need to be addressed in the context of establishing whether an operator enjoys market power: although
narrowband services may be considered to be in a market of their own, for example, operators with a
strong position in this market may not enjoy market power because of the competitive threat they are
facing from broadband providers (even though they do not impose a strong constraint in the other
direction).
Vertical relationships
The range of services to which a broadband customer may get access is not necessarily affected only by
the technical parameters of the network. It may also depend on vertical relationships between network
operators and service providers. At present, most services are accessible over the public internet, and
thus through any network connection that supports the required bandwidth and latency. However, this
does not have to be the case. For example, until recently, in the UK BSkyB’s video on demand service, ‘Sky
Anytime+’ was available only over a Sky broadband connection.
Some proprietary services also exist in relation to mobile broadband offerings.28 For example, the mobile
M-PESA payment service used in Kenya, and others in Afghanistan and Tanzania is only available on a
single operator’s network in a given country.29 For example, in Kenya, where it is estimated that up to 25
per cent of the population uses the M-PESA payment system,30 the service is only available over the
‘Safaricom’ network.31 Other operators may offer their own proprietary mobile payment services, and
access to the service may be expected to have a strong impact on mobile network choice.
With the choice of network being service-driven, consumers may be unable to switch between broadband
offers if the content in which they are interested is unavailable over alternative platforms. Here again the
maturity of the service under consideration (e.g. whether it attracts mostly early adopters or has mass
market appeal) is important, and market boundaries may change as services move from niche to general
interest. Where the majority of customers is interested in using a particular service such as mobile
payments, for example, that is available only over some networks, these networks may need to be
considered as being in a separate market. Again, what matters here is the proportion of ‘marginal’
consumers, i.e. users who are prepared to forego access to such services in response to an increase in the
price above the competitive level.
27 See Federal Communications Commission (2001), Federal Trade Commission (2000), Department of Justice (2000).
28 Where a service provider agrees to make services available exclusively over a particular network, it obviously matters
how many customers are connected to this network. From the perspective of the service provider, the broadband network
will be more attractive the more customers can be reached. This gives rise to the complications of market definition in two-sided
16
markets, where the appropriate basis of the SSNIP test would have to take account of the fact that a reduction in
demand on one side will also reduce demand on the other side, which would magnify the impact of a price increase (see,
for example, Evans and Schmalensee, 2007, p 173f.).
29 “M-PESA is an innovative mobile transfer solution that enables customers to transfer money. It is aimed at mobile
customers who do not have a bank account, either by choice, because they do not have access to a bank or because they do
not have sufficient income to justify a bank account.” See www.safaricom.co.ke/personal/m-pesa/how-to-register/faqs
30 See Vodafone’s website at http://enterprise.vodafone.com/products_solutions/finance_solutions/m-pesa.jsp
31 “M-PESA is only available on Safaricom SIMs, so only a Safaricom subscriber can deposit or send money.” See Safaricom
website at www.safaricom.co.ke/personal/m-pesa/how-to-register/faqs

Bundling
Even in the absence of exclusive arrangements, bundling may affect the substitutability of broadband
services offered through different networks or by different providers. In the presence of bundled offers,
should the relevant market comprise bundles or individual products, or potentially both?
While bundling network connectivity and services may be the most efficient way to overcome the co-ordination
problem that can arise from the service-driven demand for bandwidth, it may also have the
effect of limiting customer switching to alternative offers and may thus affect market definition.
Customers may sometimes find it difficult to compare bundled offers where packages are different, for
example, in terms of channels being offered, broadband speeds and the inclusion of deals on certain calls
(e.g. flat rates on national calls). This increases search costs and may be customers less likely to respond
to price increases by looking for alternative suppliers and switching their demand to these.
Perhaps more importantly, customers may find themselves locked-in to bundles where an individual
component might not be available through any other means or where the contractual terms limit their
ability to break the bundle. 32 Certainly in relation to ‘traditional’ telecommunications service bundles
(access, voice calls and potentially value-added services) the ability of operators to compete in the
provision of individual components has been limited. This has been one of the lessons from the first phase
of liberalization in South Africa, where the fact that Telkom could offer a bundled package of voice, data
and value added services was seen by competitors who could only offer value-added services as a major
hindrance (see Sibanda, 2006).
Customers may also be averse to unpicking bundles in response to price changes of individual
components offered by rivals, given increases in transaction costs. Here again, the key issue is how large
the proportion of customers unable or unwilling to consider sourcing individual components (captive
customers) is compared with the proportion of customers who would be willing to unpick the bundle and
switch to buying individual components.
One approach to addressing the question whether bundled services should be considered to be a
separate market that has been advocated for example by the European Commission is to look at whether
customers would be prepared to unpick the bundle in response to a price increase and switch to
purchasing individual components.33 This is linked to (though slightly different from) the question
whether suppliers of individual bundle elements would be able to attract customers away from buying
bundles and source individual components instead.
One needs to be careful, however, in terms of adopting the correct starting point for assessing the effects
of an increase in the bundle price. This is because a hypothetical monopolist of the service bundle would
be expected to set prices in such a way that any increase in the bundle price would be unprofitable, taking
into account the propensity of consumers to switch to individual services, both those supplied by the
hypothetical monopolistic bundle provider and potential competitors offering services on a stand-alone
basis. This means that, starting from optimally set bundle discounts, any increase in the prevailing price of
a bundle will by definition be unprofitable, regardless of whether the supplier of the bundle is facing
competition from firms supplying individual components or is setting its bundle price in the face of limited
32 For example, “[a]n OECD data collection of over 2 000 offers of stand-alone and bundled services from 90 firms across
30 OECD countries reveals that broadband services in the OECD are overwhelmingly sold as mixed bundles, allowing users to
choose among stand-alone offers or bundled services. Of the 90 operators surveyed, 77% allow users to buy stand-alone
broadband service. 17% tie broadband service to a fixed-line voice service and 4% require a television package to obtain
broadband access. Only 2% of the offers surveyed required subscribers to take a triple-play service to have broadband.” See
OECD (2011a), p 3.
33 For example, in its explanatory note to the EC Recommendation on ICT markets, the EC notes that “[i]f, in the presence
of a small but significant non-transitory increase in price there is evidence that a sufficient number of customers would
“unpick” the bundle and obtain the service elements of the bundle separately, then it can be concluded that the service
elements constitute the relevant markets in their own right and not the bundle” (European Commission, 2007b, p15).
17

competition, e.g. because not all of the bundle components would be available from other suppliers.34
This means that, in line with the general principles of market definition, one should use the competitive
bundle price as a starting point when examining whether customers would be willing to unpick bundles in
response to a price increase, noting that this might be different from the prevailing bundle price.35
Establishing the competitive bundle price is of course far from straightforward and might, for example,
involve considering the cost savings that can be justified by economies of scale and scope. In addition,
information about actual switching between bundles and individual products, or the general take-up of
bundles and individual products might be considered by NRAs.
Box 3: Looking at service bundles – an example
A study of bundling in Hungary assessed the impact of an increase in a hypothetically competitive price of
certain bundles (using a critical loss test36).
The study used results from a survey of 1 000 members of the Hungarian population. A special, situation-adaptive
18
questionnaire design was applied in order to obtain stated preference reactions to a 10 per cent
price increase against a hypothetical competitive price for any given bundle of services (this starting price
was calculated by applying a discount to tariffs available in the market at the time i.e. acting as a proxy a
hypothetical competitive offer).
The study then used a critical loss test to consider whether there is a separate market for triple play
bundles. This test establishes “whether the loss of sales is above a critical level when the variable cost
savings and the larger price cannot balance the effect of diminishing quantity.”
The study found that only between 5 per cent and 10 per cent of customers would respond to an increase
in the bundle ‘price’ by 10 per cent by breaking up the bundle (or ceasing to buy altogether). In terms of
the stability of bundles, the research found the combination of internet and television to be most stable,
followed by the triple-play bundle including internet, television, and telephony. The telephony-TV
package was the least stable. This shows that bundles may well be considered to be in separate markets
in Hungary.
Source: Papai et al (2011)
There are few general conclusions that hold regardless of the specific circumstances, and depending on
the nature of the services and service bundles under consideration, one might find:
• a separate market for the bundled product in addition to markets for the individual
components (e.g. a market for broadband access, a market for television services, and a
market for dual-play broadband and television services);
• separate markets for the bundle components, but no separate market for the bundle;
• a single market for the bundle and its constituent parts. 37
34 This is analogous to the well-known ‘cellophane fallacy’ encountered in the process of market definition discussed
above.
35 Of course, in this case one would not have to undertake the market definition exercise (see previous footnote).
36 For a description of the critical loss test see for example Davies and Garcés (2009),
37 See BEREC (2010b). The case where there is a market for the bundle but no markets for individual components is
unlikely if individual elements are bought and sold separately by at least some customers. It has been recognized, however,
that in the case of complementary services (which is commonly the case with service bundles) the process of market
definition may produce unreasonable results if it starts from an individual component and proceeds by including further
services that are offered as parts of a bundle (see, for example, Gual, 2003).

3.3 Wholesale market definition
In order to pursue the goal of minimizing regulatory intervention at the retail level through imposing
access obligations at the wholesale level, it is important to identify wholesale services that would enable
competitors to provide services to retail customers.
If there is strong competition at the network level, such wholesale services may be offered on commercial
terms as network operators can take advantage of strong brand or other specific skills of downstream
competitors to expand the retail market. However, in the absence of network competition, such
wholesale services will only exist as a result of regulatory intervention. This provides considerable latitude
to regulatory authorities in terms of the range of access products they would like regulated firms to
provide. Policy objectives therefore play a major role in the identification of wholesale markets.
Identification of wholesale services
Ideally, wholesale access obligations should promote the emergence of competition across the value
chain by limiting the ability of incumbent operators to leverage control over infrastructure that cannot be
easily replicated (at least not in the short term). Because regulatory obligations should ultimately be
limited to these parts of the value chain, it is however also important that such access obligations provide
the right incentives for investment in alternative infrastructure wherever economically feasible. Access
obligations should provide the right ‘build-or-buy’ incentives.
In pursuit of these objectives, NRAs may identify a wide range of wholesale services at different layers of
the value chain. This will clearly present third parties who have not invested in their own infrastructure
with a wide range of opportunities for reaching retail customers, and will thus facilitate retail competition.
This is clearly beneficial to end users, and the best option in cases where the roll-out of alternative
networks is prohibitively costly.
At first sight NRAs may be tempted to expect that offering a wide choice of wholesale products promotes
infrastructure investment by enabling third parties to enter the market at the retail level, attract
customers, and then invest in infrastructure in order to replace the purchase of access over time. The
underlying idea is that access seekers would climb a ‘ladder of investment’: having established a presence
in the market using initially what might be no more than fully managed connectivity offered on wholesale
terms, third parties would invest in their own infrastructure and seek to purchase access services further
up the value chain.38 Offering this opportunity to third parties is intended to reduce the amount of
investment required to enter the market in the first place and make it easier to start building a customer
base.
The ‘ladder of investment’ view has particularly shaped the regulation of broadband access and the
identification of broadband markets in Europe, where wholesale markets have been identified for both
bitstream access and unbundled local loops. However, a layered approach to the identification of
wholesale access is also used elsewhere. Box 4 provides some examples.
19
38 See Cave and Vogelsang (2003) or Cave (2006).

Box 4: Layered approaches to the regulation of wholesale services
Europe – As recommended by the European Commission in December 2007, the relevant broadband
market includes ‘Market 5’ or ‘Wholesale broadband access’ that “comprises non-physical or virtual
network access including ‘bit-stream’ access at a fixed location. This market is situated downstream from
the physical access…in that wholesale broadband access can be constructed using this input combined
with other elements”. ‘Market 4’ related to ‘Wholesale (physical) network infrastructure access (including
shared or fully unbundled access) at a fixed location’ is relevant for access to the physical infrastructure
that would allow a new entrant to develop and roll-out new services of their own design without the need
to install their own physical network.
Japan - In Japan, regulation of fixed broadband access (independent of technology) distinguishes between
different ‘layers’ including physical access, service, platform and content. This framework means that,
“competition, speed, availability, and discrimination are examined within each layer” however, “[t]he
government generally views competition in a layered model, and tends to work more aggressively to
preserve competition at the physical layer.” With the emergence of more IP based services, the need for
telecom service providers to enhance their business to include the upper layers such as content and
applications was recognized, but together with the shift towards a vertically integrated structure for the
regulator, ensuring ‘openness’ among each layer will be increasingly important.
Malaysia - In Malaysia, the regulatory approach also comprises network layers. The Communications and
Multimedia Act (CMA) relates to four categories: ‘network facility provider’ (owners of facilities, including
telecom lines and exchanges, radiocommunications transmission equipment, etc.); ‘network service
provider’ (provides the basic connectivity and bandwidth to support a variety of applications. Network
services enable connectivity or transport between different networks); ‘application service provider’
(provides particular functions, such as voice services, data services, content-based services, electronic
commerce and other transmission services. These are the functions or capabilities that are delivered to
end-users); and ‘content service provider’ (a special subset of application service providers. Includes
traditional broadcast services and newer services such as online publishing and information services).
Under Section 149 (Standard access obligations for facilities and services) of the Communications and
Multimedia Act 1998 (Part VI, Chapter 3, Section 149) “[…] a network facilities provider and a network
service provider shall provide access to their network facilities or network services listed in the access list
to any other— (a) network facilities provider; (b) network service provider; (c) applications service
provider; or (d) content applications service provider, who makes a written request for access to such
network facilities provider or network service provider on reasonable terms and conditions.”
Sources: European Commission (2007a); Berkman Center for Internet & Society (2010); Taniwaki (2004); Malaysian
Communications and Multimedia Commission.
However, while offering third parties a wide choice of potential wholesale services is an effective tool of
promoting retail competition, there is no strong evidence to support the view that such a layered
approach facilitates investment in competing infrastructure, as suggested by the ‘ladder of investment’
concept.
An international study by Bouckaert et al. (2010) looking at the evolution of broadband penetration in
twenty OECD countries over the five-year period from 2003 to 2008 and a detailed case study of the
evolution of broadband services found that whilst “[t]he ‘ladder of investment’ theory argues that it is
good to promote intra-platform competition as a stepping stone for new entrants to induce them to invest
… there may not be an empirical support for this theory, and that to the contrary intra-platform
competition may even give adverse investment incentives. To improve broadband penetration, the
promotion of inter-platform competition is likely to be a more effective policy.”
20

Another study of 15 European broadband markets by Bacache et al. (2011) finds that the ladder of
investment appears to work for the step from bitstream access to unbundled loops, but not for the
further step towards next generation access infrastructure, where alternative models may need to be
pursued. A point in case is the example of Australia, where the government is promoting the roll-out of a
national broadband network through a specific company (NBN Co Limited) based on a mix of optical fibre,
satellite and fixed wireless technologies with an obligation to provide open access in exchange for public
sector support.39
The definition of separate wholesale markets for bitstream access and unbundled loops would seem to be
difficult to reconcile with the standard principles of market definition if these services are substitutable
for each other. If different wholesale services are in the same economic market, however, this has
profound implications for the setting of regulated access charges, as these charges determine which of
the regulated wholesale services will be most attractive to access seekers. For example, a low access
charge for bitstream access will undermine demand for unbundled loops, and vice versa. This is
particularly problematic in relation to providing the correct build-or-buy incentives as setting any
particular access charge too low would discourage access seekers from investing in their own
infrastructure. Put differently, a proliferation of access products increases the chance of getting the build-and-
buy incentives wrong because setting any of the access charges too low will not only make this
particular access product more attractive than any other access product, but also make buying access
more attractive than investing in own infrastructure.
Perhaps it is in recognition of these problems that the layered approach to identifying wholesale markets
is not used universally. The US, for example, used to follow an open access approach but in 2002 shifted
its focus on inter-platform competition between the two main network infrastructures in the United
States, copper and cable networks, even though the fact that there were no open access provisions in the
National Broadband Plan attracted some criticism.
21
39 Further details on Australia’s NBN are at: www.nbn.gov.au/.

Box 5: Inter-platform competition as an alternative intra-modal competition
In the United States, the implementation of the Telecommunication Act of 1996 introduced the concepts
of unbundling, interconnection, co-location and wholesale access as elements of open access. While
initially implemented for the purposes of competition in the fixed telephony market, as DSL became
increasingly important for the provision of internet services the applicability of a similar open-access
approach was considered. Moreover, in the late 1990s and early 2000s the emergence of a significant
cable network raised questions of the applicability of open access regulation to cable networks. Following
a series of appeals from network operators, in 2002, FCC changed its approach to regulation of the
internet access market and embraced the theory of ‘inter-modal’ competition between incumbent
telephone companies and incumbent cable companies. The FCC believed that competition between the
two networks would be sufficient to discipline the operators within the broadband market. In essence,
the FCC was defining broadband as a single market independent of the technology used for its provision.
While the Supreme Court questioned the approach, it was eventually approved and inter-modal
competition was favoured over the originally proposed open-access regime.
Similarly, in Chile while the regulatory framework is based on free access, “the unbundling of the
telecommunications network is not considered to be part of the current policy agenda” and the broadband
market in Chile is now focused on high levels of inter-platform competition. The importance of platform-based
22
competition has been claimed as one of the key features that have led to the development of the
broadband sector in Chile and a reduction in broadband prices. In terms of broadband, Chile is now one of
the most advanced broadband countries in Latin America.
Sources: Berkman Center for Internet & Society (2010), Katz and Avila (2010)
Delineating wholesale markets
Ultimately wholesale demand is derived from retail demand, and therefore, substitutability at the retail
level needs to be taken into account when considering the appropriate delineation of markets for the
purpose of regulatory policy.
A good example for this interaction between wholesale and retail markets is the Austrian NRA’s decision
to remove regulatory obligations to provide bitstream access for service providers seeking to supply
residential customers with fixed broadband services based on its finding that “there is a residential
broadband market at the retail level including DSL, CATV and mobile broadband” whereas there is a DSL-only
business retail market. This meant that “there is effective, sustainable competition at the residential
retail market and there is no more need for a bitstream regulation.” Consequently, the relevant wholesale
market was defined “as a market including only internally and externally provided DSL-lines which are
used to provide access to non-residential customers at the retail level.“ (BEREC, 2010a)
In the US, the FCC considers there to be a single broadband market comprising traditional fixed lines and
cable, and acknowledging the effects of mobile services, and using the strength of the competitive
interaction at the retail level as an argument to roll back regulatory obligations. As Baake (2006) states:
“After a period of rather restrictive regulatory interventions on access and wholesale markets, the national
regulator, FCC, now emphasizes the potentially adverse effects of regulation. Focusing on infrastructure
based competition, considering fixed line networks and cable networks as close substitutes and taking
mobile networks into account, the FCC has almost completely repealed regulation of broadband access
and wholesale markets. Additionally, the obligations with respect to access to narrowband network
elements have been significantly reduced.”
Such an approach may of course not be suitable in countries where alternative infrastructures do not exist,
or their construction would be prohibitively expensive. This may be the case in many developing countries,
although here the greater reliance on mobile networks should provide greater scope for infrastructure-based
competition, at least in those parts of a country where build-out is driven by the need to provide
capacity rather than purely to offer coverage.

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